The Economic Crisis:
a challenge for
Economics Education
Steve Hurd, UK, EU, World
Doris Valente, Italy, EU, World
Birgit Weber, Germany, EU, World
Stages in the Economic Crisis
1. THE GOLDEN AGE? Pre-2007
World Economy expanding rapidly
•
•
•
•
•
•
•
Freer trade and globalisation
Growth of financial markets & instruments
Debt financed expansion
Rising real incomes
Convergence of living standards
across Europe and the World
Infrastructure investment
– boom in domestic housing and commercial building.
Universal Happiness !!??
Stages…
2.
–
–
–
–
–
2007 SHOCK OF FINANCIAL CRISIS
Lehman Brothers – sub-prime mortgage collapse
Major Clearing Banks left with bad debts
Bank bailouts  Rise in government debt
Collapse of housing markets
Banks and governments at mercy of rating
agencies
Stages…
3. RESPONSE TO THE SHOCK
– Banks: collapse, recapitalise or nationalised
– Governments: cut spending & raise taxes
– EUROZONE problems – loss of national control of:
•
•
•
Exchange rate
Interest rates
Fiscal policy
Insufficient free movement of labour and capital,
fiscal harmonisation and regional transfers.
Stages…
3.
–
–
–
–
–
–
–
–
–
EFFECTS OF CRISIS
Consumer and business confidence collapses
Fall in investment and economic growth
Export markets collapse
Unemployment rises
Borrowing and Debt “Increases”
Credit ratings fall
Regional and international inequality grows
Political divisions within Europe – mutual blame
Universal Sadness!!??
How do we begin to teach this?
Effective teaching starts by:
• Discovering what students know and believe
already
• Engaging with and building upon this
Current economic crisis is a perfect opportunity
to ask students to apply and explore the
limitations of the economics they are being
taught.
But syllabuses and assessment must allow this.
Survey of European Students
•
•
•
•
What do students know about the crisis?
What questions are they asking?
What causes are they stating?
What evidence is there of misunderstanding
of facts and processes?
• How do we need to modify our teaching and
learning approaches?
EU student perceptions of the crisis
Key words (n=404)
KEY WORDS
Banks
Debt
Unemployment
Euro
Greece or Greece?
Recession
Inflation
Taxation/tax evasion
Poverty
Spreads/speculation
Interest rates
Budget deficit
Bankrupty
Questions (n=1013)
EU
96
91
78
59
53
44
38
19
16
16
12
12
11
QUESTIONS
What are the causes?
Why so much debt? What can be done?
What is the solution?
How can the Greek problem be solved?
How to solve high taxes and evasion?
Can we reform our politicians?
Why didn't we control the banks?
Why not print more money?
What is the future of the Euro?
Where did the money go?
EU
73
61
48
47
43
31
20
18
16
12
Two Groups of Students
Key words exercise
GROUP A
GROUP B
From ITALY (n=168)
From GERMANY (n=93)
Unemployment
Banks
Debt
Inflation
Taxation/tax evasion
Spreads/speculation
Poverty
Bankruptcy
Suicide
Interest rates
Recession
Balance of payments deficit
Subprime mortgages
Devaluation
Berlusconi
58
38
36
32
16
16
13
11
7
6
5
5
4
3
3
Euro
Greece
Debt
Banks
Spain
Unemployment
Fiscal pact
Italy
45
44
32
28
7
5
5
3
Students’ questions
ITALIAN Group (n=505)
GERMAN Group (n=245)
What can be done about high
taxes and tax evasion?
43
Can we reform our politicians?
31
How can the Greek problem be
solved?
Why so much debt? What can be
done?
What is the solution?
Why so much debt? What can
be done?
25
What are the causes?
23
What is the future of the Euro?
What are the causes?
Why didn't we control the
banks?
How can we avoid
unemployment?
What can be done about
subprime loans?
23
9
6
3
45
38
19
8
To what extent do you agree that the following have
contributed to causing the current economic crisis?
The Banks
High risk lending & borrowing
Tax evasion
Government borrowing
Actions by national govt
Gap between rich and poor
Interest rates
Economic Gap in EU Countries
Consumer borrowing
Capitalism
The EURO
Financial Liberalisation
Globalisation
Social welfare spending
Industry
Immigration
Emigration
-40
-20
0
20
40
60
In order to solve the crisis in YOUR COUNTRY
it is necessary to...
Strengthen the currency
Raise household savings
Raise import controls
Raise free movement of workers
Raise the money supply
Raise borrowing
Raise government spending
Raise taxes
Raise interest rates
-60
-40
-20
0
20
40
In order to solve the Crisis in the EU
it is necessary to
Increase economic growth
Regulate financial markets
Enforce balanced budgets
Help weak to pay debts
Transfer € from strong to weak
A common EU Economic Ministry
Reduce social welfare
Some countries leave EURO
-40
-20
0
20
40
60
Hope
We all have a mission!
Economics
Teachers
LIGHT
The Confused Masses
ECONOMIC
CRISIS
EU Politicians
Contribution of Economics Education
• Knowledge of economic institutions, concepts
and theories
• Skills and competencies (application/research)
• Distinguishing “cause” and “effect”
• Understanding trade-offs between desirable
objectives – opportunity cost
• Being clear about “attitudes” and “values”
Useful concepts and theories…
How
Economies
Adjust to
Shocks
Market
Regulation/
Deregulation
Free
Markets &
Market
Failure
Theory of
Optimal
Currency
Areas
Theory of
Clubs/
Moral
Hazard
Keynesian
& New
Classical
Theories
Asymmetric
Information
Club Theory
In this club we
take care of all
our members
But we do
expect all our
members to
keep to the
dress rules
Basic trade-off is between desire of a
club to grow and retain members
while preserving the club rules..
But I prefer
to wear
denim
Optimal Currency Area Conditions
(After Mundell)
1. Sufficient similarity among countries to
prevent asymmetric shocks.
2. A high degree of labor mobility and/or wage
flexibility.
3. A centralized fiscal policy that transfers
resources from countries that are doing well
to those that are doing poorly.
The Values Dimension
• The welfare of all human beings is equally
important! Social equity/fairness.
• Need to empathise with the predicament of each
country e.g. Greece, Germany.
• Recognition that the health of the European
Economies matters to the nations of Europe,
and also to the rest of the world.
• With the need for global cooperation on
environment and climate matters we need to
avoid “beggar my neighbour” policies/
protectionism.
End
Time for questions & discussion
Supplementary slides
The Survey: Countries
680 Participants, 97 % from EU by July 2012
• Italy
30 %
• Austria
23 %
• Germany
20 %
• Ireland
12 %
• France
6%
• United Kingdom
6%
• Bulgaria
2%
• Netherlands
1%
and others …
189
148
129
76
35
35
11
7
The Survey: Sex
• Male
43 %
238
• Female
57 %
321
Answered questions 559, skipped 104
The Survey: Age
Born
• 1994 (18/19)
31 %
164
• 1993 (17/18)
24 %
124
• 1995 (16/17)
21 %
110
• 1992 (15/16)
13 %
67
• 1996 (14/15)
11 %
58
Answered question 523, skipped 140
The Survey: Subjects
IGEA/ Mercurio
25 %
Social (Science) Studies
20 %
Economics
19 %
Business
15 %
Politics & Civics
9%
Science économiques et sociales 5 %
(419 answered questions, 244 skipped)
111
88
72
66
37
23
Your view to the counter-factual
statement
“The answer to the current crisis is to allow your
country’s currency (e.g. the euro) to fall in value,
to lower interest rates, to increase government
spending and lower taxes in order to create
more jobs.”